05/17/2012

GameStop shares taking a hit

GameStop’s shares were being shelled today, after the company said its second-quarter sales and profits would fall short of Wall Street’s expectations.

Paul Raines, the Grapevine video game retailer’s chief executive, said results are harder to forecast in the late stages of video game console "cycles." Raines said GameStop expects its pre-owned, mobile, and digital businesses to "fill the profitability gap" as the company awaits the launch of the new Nintendo Wii U later this year.

Raines said GameStop continues to do better than its rival in new game sales. The company improved its gross profit margin – sales minus costs of those sales, as a percentage – and the pre-owned, mobile, and digital businesses contributed "positive profit contributions," Raines said.

"We expect those segments to fill the profitability gap as we transition to the new console cycle," he told securities analysts and reporters during a conference call.

GameStop said Thursday it expects second-quarter earnings of 10 to 18 cents per share of common stock. Wall Street was looking for 25.4 cents per share.

The company also said it expected comparable store sales – those in stores open at least a year, an industy benchmark – to be down 5 to 11 percent.

GameStop maintained its guidance for fiscal year earnings of $3.10 to $3.30 per share. Wall Street ‘s consensus estimate is $3.19.

GameStop shares were down $2.09 to $18.78 shortly before the close of trading on the New York Stock Exchange.

Rob Lloyd, GameStop’s chief financial officer, told analysts and reporters on the call that the company was "widening the range" on its profit guidance "to reflect the uncertainty" at the end of the console cycle.

GameStop, confirming an earlier announcement May 10, said it made a $72.5 million net profit for the first quarter, which ended April 30, compared to an $80.4 million net profit for the same period the prior year. Earnings per share were 54 cents in the latest quarter, compared to 56 cents for the same period the prior year.

Sales in comparable stores – those open at least a year, an industry benchmark – were down 12.5 percent for the quarter, as GameStop also disclosed May 10.

Raines said GameStop’s fast-growing PowerUp Rewards affinity program hit 18 million members during the quarter, and members accounted for 72 percent of sales. PowerUp customers are spending $358 on average annually, and account for 35-40 of all video game consumption in the United States, Raines said.

Raines also said GameStop’s rivals in the pre-owned game business continue to contract, giving the company "confidence in our pre-owned model."

He also estimated that, at $75 per used console, gamers have $1.8 billion worth of trade currency available, should they elect to buy a new Wii U or other new consoles on the drawing board.